Zimbabwe: Selected Issues and Statistical Appendix

Rapid depreciation of the parallel market rate in 2002 gave exporters little incentive to surrender receipts through the official system, and inflows into the RBZ remained low. The government responded by raising the surrender rate and tightening exchange restrictions in November 2002. Faced with increasing foreign exchange shortages, the government eventually depreciated the official rate for exports in end-February 2003, but to date with little effect.

Abstract

Rapid depreciation of the parallel market rate in 2002 gave exporters little incentive to surrender receipts through the official system, and inflows into the RBZ remained low. The government responded by raising the surrender rate and tightening exchange restrictions in November 2002. Faced with increasing foreign exchange shortages, the government eventually depreciated the official rate for exports in end-February 2003, but to date with little effect.

VII. Foreign Exchange System and Developments72

A. The Foreign Exchange System through November 2002

205. Zimbabwe had in place restrictions on the use of foreign exchange, and exporters faced a surrender requirement. The surrender requirement had been increased in July 2001 from 25 percent to 40 percent for all goods except gold and tobacco (Figure VII.1).73 Private sector entities were allowed to service their external debt, though RBZ approval was required for new loans in excess of US$5 million. The surrendered foreign exchange was utilized for state imports of essential items, such as fuel, and electricity, and the allocations were subject to approval by a foreign exchange allocation committee -comprising officials of the RBZ and the Ministry of Finance and Economic Development. Exporters holding foreign currency accounts with commercial banks could utilize them for imports, subject to an import priority list.

Figure VII.1
Figure VII.1

Export Surrender Requirements and Weighted-Average Surrender Rate

(In percent)

Citation: IMF Staff Country Reports 2003, 225; 10.5089/9781451841480.002.A007

206. A premium procurement-price regime applied to gold exports; periodic adjustments in this price, in line with the depreciation of the parallel rate during 2002 kept the effective surrender rate faced by gold producers at par with the average surrender rate for all exports. The RBZ is the sole exporter of gold, which it buys from domestic producers. While gold producers do not face a formal surrender requirement, the RBZ monopsony amounts to a surrender as long as procurement prices are lower than international prices converted at the parallel exchange rate. As the procurement price reflects the official exchange rate, it initially amounted to a 100 percent surrender. In April 2001, the government introduced a “premium” procurement price for gold to address smuggling and declining purchases by the RBZ; as a result, the effective surrender rate for gold fell from 100 percent to 79 percent.74 The effective surrender rate climbed during the April-November period when adjustments in premium prices did not keep pace with the depreciation in the parallel market—by December 2001, the surrender for gold had climbed to 87 percent. An increase in the premium price in December 2001 and the introduction of an allowance for gold producers to have access to foreign exchange worth 40 percent of their gold sales to the RBZ resulted in a decline in the effective surrender rate to 48 percent. Since then, premium prices have been adjusted upward periodically, largely keeping pace with the depreciation on the parallel market rate and the effective surrender rate has stayed at around 50 percent, about the same as the rate for other exports.

207. Special rules also applied to tobacco exports and the government tightened foreign exchange restrictions on tobacco auctions and exports in 2002. Prior to April 2002, the surrender regime for tobacco distinguished between multinational and local buyers of tobacco on the auction floors; the former had to surrender 70 percent at the official rate and the latter 40 percent. With multinational buyers constituting a large share of the buyers, staff estimates an effective surrender rate of 60 percent. At the start of the tobacco auction season in April 2002, the government removed the distinction between foreign and local buyers and decreed that all tobacco purchases on the auction floors had to be paid for in foreign exchange—effectively a full surrender requirement; any repatriated foreign exchange receipts in excess of the auction floor purchases (basically applicable to local tobacco processors) were subject to the same surrender rate as other exports. Staff estimate that the effective surrender for tobacco between April and November 2002 was 73 percent.75

B. Developments in the Foreign Exchange Markets through November 2002

208. The parallel market exchange rate continued to depreciate during 2002. While the rate was steady through May, it fell sharply twice (Figure VII.2). In June, when the results of the presidential election became clear, and economic reforms were not forthcoming, the parallel rate depreciated by more than 90 percent from Z$370 per US$1 in May to over Z$600 per US$1 in June. In October, when the severity of the food crisis became apparent, and state imports of food and fuel put pressure on the foreign exchange market, the parallel exchange rate again depreciated sharply and reached almost Z$ 1,700 per US$1 in November 2002.

Figure VII.2
Figure VII.2

Official, Parallel and the Real Effective Exchange Rates

Citation: IMF Staff Country Reports 2003, 225; 10.5089/9781451841480.002.A007

209. Foreign exchange inflows into the RBZ remained low through the year. The ever-increasing premium on the parallel market, coupled with the high surrender requirement increased the exporters’ disincentive to channel their activity through the official system. Capital flight continued, with important means being over-invoicing of imports and under-invoicing of exports, as well as through fictitious debt service payments. By the end of the tobacco auction season in October, during which foreign exchange inflows into the official system typically increase, there was a severe foreign exchange shortage, making it difficult for the state to meet the country’s mounting food and fuel import needs.

C. The November 2002 Measures

210. In mid-November 2002, the authorities reacted to the declining foreign exchange inflows and skyrocketing parallel market premium by raising the export surrender requirement and tightening controls over the parallel market. All foreign currency bureaus were closed and only banks were allowed to deal in foreign exchange. The surrender requirement for exports, other than gold, was increased from 40 percent to 50 percent as of mid-November. The increase in surrender requirement also applied to the repatriated portion of tobacco exports in excess of auction floor outlays—as a result the effective surrender rate for tobacco rose to 78 percent. Rules governing non-surrendered foreign exchange receipts for all exports were also changed; the retained export proceeds now had to be deposited with the RBZ, instead of commercial banks. Authorized dealers who obtained foreign exchange in the market for their own account (foreign exchange unrelated to merchandise exports or corporate foreign currency accounts, such as exports of services) were also required to surrender one-half of their proceeds to the RBZ, with the remaining 50 percent available to meet all other market requirements. To curb fictitious debt service, prior approval from RBZ was required for all external borrowing.

211. Instead of easing the situation in the official market, these measures worsened the shortage and contributed to a sharp depreciation of the parallel market exchange rate. The lack of a coherent policy package to address the economic crisis, coupled with a continued rapid growth of money, increased inflation to 200 percent by end-December 2002 and resulted in a sharp depreciation of the parallel exchange rate. Tighter exchange restrictions and the increase in the surrender rate increased the incentives to under-invoice exports and over-invoice imports, further reduced foreign exchange inflows in the official market—inflows into the RBZ dropped 35 percent in the November 2002-January 2003 period compared to a year earlier. A large portion of the non-official foreign exchange transactions moved offshore.

D. The February 2003 Measures

212. In February 2003 the authorities introduced an Export Incentive Scheme—devaluing the currency for exporters and abolishing all other special export schemes. The acute foreign exchange shortage at the RBZ, coupled with increasing complaints by the business community about the overvalued official exchange rate led the authorities to effectively devalue the official exchange rate for most transactions. Under the scheme, the surrender requirement remains at 50 percent but exporters receive a rate of Z$800 per US$1 for the surrendered portion of their foreign exchange receipts—a significant reduction in the tax implicit in the surrender regime.76 In light of the exchange rate adjustment, the special schemes for tobacco exports and premium prices of gold have been abolished. Exporters continue to use their retained foreign exchange to import from the priority list with RBZ approval. “State purchases” of foreign exchange would continue at the rate of Z$55 per US$1, and all other importers have to buy foreign exchange at an exchange rate of Z$848 per US$1.

213. Until April 2003 the Export Incentive Scheme had not yielded a supply response and foreign exchange inflows in the RBZ continued at very low levels. This reflects a lack of confidence toward the government’s economic adjustment and reform policies, and is further exacerbated by political tensions. While the parallel market exchange rate has appreciated from its December 2002 low to reach Z$l,400–1,500 per US$1 in April 2003, it still represents a premium of more than 80 percent over the official rate. The close ties of banks with neighboring countries make it relatively easy for businesses to conduct part of their external transactions off-shore. To alleviate shortages of fuel and electricity, some public enterprises have purchased foreign exchange in the parallel market.

STATISTICAL APPENDIX

Table 1.

Zimbabwe: Expenditure on GDP, 1995–2000 1/

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Source: Central Statistical Office.

Comprehensive data for 2001–02 are not yet available. Nominal GDP estimates are Z$506,792 million for 2001, and Z$1,062,045 million for 2002.

Table 2.

Zimbabwe: Gross Domestic Product, 1997–2002

(Percent change at constant 1990 prices)

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Source: Central Statistical Office; and IMF staff estimates.
Table 3.

Zimbabwe: Agricultural Crop Production, 1996/97–2001/02

(In thousands of tons)

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Sources: Central Statistical Office; Ministry of Lands, Agriculture and Rural Resettlement; and Reserve Bank of Zimbabwe estimates.

Large- and small-scale commercial farms.

Includes deltapine and delmac cotton.

Communal lands and resettlement areas.

Table 4.

Zimbabwe: Prices of Marketed Agricultural Crops, 1996/97–2001/02 1/

(Unit values in Zimbabwe dollars per metric ton)

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Sources: Central Statistical Office; and Grain Marketing Board.

Crop years.

Table 5.

Zimbabwe: Area Under Cultivation for Major Crops, 1996/97–2001/02 1/

(In hectares)

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Sources: Central Statistical Office; and Ministry of Finance.

Crop years.

Table 6.

Zimbabwe: Volume and Value of Livestock Slaughtering and Milk Production, 1996–2001

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Source: Central Statistical Office.
Table 7.

Zimbabwe: Livestock in Communal and Commercial Farming Areas, 1995–2000

(In thousands)

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Source: Central Statistical Office.
Table 8.

Zimbabwe: Volume of Manufacturing Output, 1997–2002

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Source: Central Statistical Office.

Weight is in percent.

Table 9.

Zimbabwe: Mineral Production Volumes, 1997–2002

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Sources: Ministry of Finance; Central Statistical Office; Reserve Bank of Zimbabwe; and Ministry of Mines.
Table 10.

Zimbabwe: Construction and Retail Trade, 1996-2001

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Source: Central Statistical Office.

2001 figures as of September.

Includes additions and alterations.

2001 figures as of May.

Includes repairs and maintenance.

1997 index through August.

Table 11.

Zimbabwe: Electrical Energy Produced and Distributed, 1996–2001

(In millions of kilowatt-hours)

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Source: Central Statistical Office.

Drawings from the grid of the Central African Power Corporation.

Net imports from noninterconnected sources.

Power generated from South Kariba is Zimbabwe’s share, but it is fed into the Central African Power Corporation grid.

Table 12.

Zimbabwe: Petroleum Products, 1997–2003

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Sources: National Oil Company of Zimbabwe; and Zimbabwean news sources.
Table 13.

Zimbabwe: Consumer Price Index, 1997–2003

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Source: Central Statistical Office.

In percent.

Table 14.

Zimbabwe: Employment and Employment Earnings, 1996–2001

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Source: Central Statistical Office.

Public administration, health, and education.

Table 15.

Zimbabwe: Central Government Operations, 1996/97–2002 1/

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Sources: Zimbabwean authorities; and IMF staff calculations.

Fiscal years July-June through 1996/97; 1997/98 covers the 18-month period July 1997-December 1998. Annual thereafter.

On a commitment basis.

Table 16.

Zimbabwe: Detailed Central Government Revenue, 1996/97–2002 1/

(In millions of Zimbabwe dollars)

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Sources: Zimbabwean authorities; and IMF staff calculations.

Fiscal years July-June through 1996/97; 1997/98 covers the 18-month period July 1997-December 1998. Annual thereafter.